Australia has slipped dramatically in international rankings measuring innovation and economic complexity over the past couple of decades.

The Atlas of Economic Complexity, produced by the Growth Lab at Harvard University, measures (you guessed it) the complexity of economies around the world. The researchers analysed 133 countries and placed Australia at 93, an embarrassing rank. This makes our economy less economically complex than Uganda, ranked 92. In the 2000 version of this ranking Australia sat significantly higher (rank 60).

We also continuously lost ground on the Global Innovation Index published by the World Intellectual Property Organisation. When the ranking was first published in 2007, Australia was considered the 17th most innovative economy. Now, we are ranked the 24th most innovative economy. Considering our high GDP, we should be able to invest more into innovation than we have in the past.

Australia has become lazy and complacent. We have rested too long on our laurels.

The simple business model of Australia allowed us to fall behind in these rankings without experiencing immediate pain.

Quick recap on what our national business model actually is. We sell raw mining and agricultural commodities to the world, largely to Asian nations. On top of these we educate international students and entertain international tourists. That’s it. That’s all we do as a nation that is of any concern to the rest of the world.

On the back of a booming Chinese economy over the past two decades selling some basic raw commodities was enough to grow our economy. We not only failed to diversify our economy but made it less diverse. This is a problem now that China started its inevitable demographic decline. We react to this by broadening the range of countries we sell stuff to, as I described in an earlier column.

Before we explore what could be done to diversify our national economy, we must quickly discuss whether economic diversification is worth the effort. Countries should certainly stick to their strengths.

Any additional economic activity must be globally competitive or at the very least improve national sovereignty. We push for more pharmaceutical manufacturing in Australia not because it is cheaper to produce here than in China but rather as a hedge against the next global supply chain disruption. Better to have slightly more expensive medicine than no medicine at all.

If we don’t diversify, any complications with any of our four economic pillars can get us into deep trouble. This is, by the way, the reason why I am confident that neither a Labor nor a Liberal government would significantly slow down the intake of international students. Economic diversification must make sense though in the Australian context. We must work to our strengths.

The lowest hanging fruit is value-added manufacturing in mining and agriculture. Selling flour rather than wheat or selling steel rather than iron ore makes sure we move higher up the value chain and have more foreign currency flow into Australia. The reason Australian commodities receive their value-add overseas rather than locally are our high labour and energy costs.

To make value-added manufacturing a reality in Australia, cheaper energy is a must. Labour costs can be kept down by investing into automation and robotics.

To that effect the Made in Australia policy is a step in the right direction as it aims to value-add to our biggest exports (mining and agriculture). A fair criticism of this Labor policy is that the government is picking winners as it heavily favours renewable energy projects.

Unfortunately, this criticism comes from a Liberal Party that thinks we can establish a completely new nuclear energy sector out of nowhere at competitive costs. Picking renewables as a winner makes more sense as Australia has an established research network to draw from.

The bigger picture from an environmental perspective is that any type of value-added manufacturing should take place in Australia rather than overseas if we can do it at a lower carbon footprint.

I’d argue that increasing manufacturing in Australia would help to soften the pain in quite a few areas.

Australia faces major demographic disruptions. The ageing of society has obvious impacts on the healthcare system, but it also changes the geography of Australia for the worse. Most small regional towns are purely functional settlements aimed at supporting local agriculture.

These areas are shrinking their population base and will continue to do so. Farm aggregations and technological innovations mean fewer workers are needed to achieve the same or even improved yields.

This in turn means fewer jobs need to be in regional areas. As small towns shrink their services become unviable. GPs leave, the local supermarket closes, the local footy team needs to merge with their big rivals from the neighbouring town.

Slowly, the lifeblood gets sucked out of these towns. No country in the world concentrates such a high share of its population in just five cities. Over two-thirds of all Australians cram into our five largest cities.

This further drives up house prices, ensuring Australia features among the world’s least affordable housing markets.

Decentralisation of population is needed; growth in regional Australia is needed. Our unnecessarily high house prices hurt society in many ways, but they also channel private household investments that might’ve gone to the stock market to the housing system. Less money in the stock market means economic diversification is less likely too.

Over the past 50 years, Australia slowly but steadily eroded its middle class. By now the middle class is the smallest, rather than the largest segment of the workforce. The wealth structure in Australia increasingly looks like a letter U rather than a Bell curve. I asked the question in a previous column if Australia is overeducated considering the type of economy we are running.

Value-added manufacturing jobs would help to strengthen the Australian middle-class. In fact, value-added manufacturing helps to solve all the problems mentioned above.

Economic complexity improves; we export more profitable goods; we create regional jobs; we grow regional towns; we ease population pressure in our biggest cities; GDP per capita increases; we amp up our declining middle class.

Environmental arguments that manufacturing produces emissions must be viewed in a global context. The current destinations where Australian raw commodities receive their value-added treatments have looser environmental regulations. Manufacturing in Australia rather than overseas might be a net positive for global emissions.

There are obvious challenges along the way, too.

Australia is experiencing a prolonged skills shortage that is baked into the demographic pie and that will not improve (even under a high migration scenario) in the coming decades.

Value-added manufacturing will need to be heavily automated to make the most of the endless opportunities in the sector.

Building new factories and investing in new machinery is freakishly expensive. We must help our local manufacturing industry to make these investments.

In encouraging producers and manufacturers to invest in times of elevated interest rates (I argued last year that demographics ensure interest rates will stay high for the coming decade), governments can help to push the value of our existing exports (mining and agriculture in particular) to new heights.